Labor Unemployment Risk and Corporate Financing Decisions

By Ashwini Agrawal, David A. Matsa. 2013

493 citations recorded by the source corpus.

This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/2e5a609914dd601957eb3604775193ed136ec6a0

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Citations in the corpus

Firing Costs and Capital Structure Decisions (2016, unknown): “I next match these laws to the state in which each firm is headquartered (see, for example, Matsa (2010), Agrawal and Matsa (2013), Acharya, Baghai, and Subramanian (2014), Dougal, Parsons, and Titman (2015)).11,12 For each exception type, Table I summarizes the dates when exceptions were passed by…”
Labor Unemployment Insurance and Earnings Management (2016, unknown): “aversion, and (iii) costs borne by workers during unemployment (Agrawal and Matsa, 2013).”
Are employee-friendly workplaces conducive to innovation? (2016, methodology): “Following Agrawal and Matsa (2013) and Flammer and Luo (2016), we measure the generosity of a state’s UI benefits as the product of the maximum benefit amount and the maximum duration allowed.”
Crowdsourced employer reviews and stock returns (2019, methodology): “We measure labor intensity following Agrawal and Matsa (2013) and John et al. (2015) , sort firms into two groups based on the median level of labor intensity in the portfolio formation month, and repeat the return analysis as in Table 6 .”
Labor Protection and Leverage (2015, unknown): “Given that the debt capacity (3) is decreasing in employment protection, the project can be undertaken without using external equity (that is, F ≤ D̂) only for a sufficiently low level of employment protection.”
Employee Rights and Acquisitions (2015, unknown): “Agrawal and Matsa (2013) find that companies in states with low unemployment benefits choose more conservative financial policies to mitigate employees’ unemployment risk, resulting in lower leverage.”
The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity (2018, background): “5 Agrawal and Matsa (2013) and Brown and Matsa (2013) provide evidence supporting this idea.”
Cash holdings and employee welfare (2013, unknown): “This literature identifies several laborrelated factors affecting leverage, such as the human costs of bankruptcy (Berk, Stanton, and Zechner, 2010), strategic bargaining with labor unions (Matsa, 2010), labor market size (Kim, 2012), the use of temporary workers (Kuzmina, 2012), unemployment risk (”
Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach (2015, methodology): “Following Agrawal and Matsa (2013), I define labor intensity as the median wages-to-sales ratio in the company’s two-digit Standard Industrial Classification (SIC) industry in the year preceding the vote.”
Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants (2014, background): “Adding a lagged dependent variable (Row [2]),21 one more lag and two leads of Bind (Rows [3] and [4]) also leaves the estimated impact little changed, suggesting that sluggish employment dynamics and related timing issues are also not driving the results.”